Brokers And The Meese Motto

July 12, 1985|By William Safire. (copyright) 1985, New York Times News Service.

In excoriating the Meese Justice Department for its criminal-coddling disposition of the E.F. Hutton check-kiting case, I noted that the errant firm`s former president, George L. Ball, left Hutton only a few months after the grand jury investigation began, to take the job as chief executive officer at Prudential-Bache Securities Inc.

That brought in a tip: Look into the way Ball was handling internal charges of sharp practice by at least one of Prudential-Bache`s compliance officers.

The whistle-blower charged that the firm`s Research Fund--a mutual fund supposedly following the recommendations of the firm`s research department

--had been handled improperly, and the compliance officer`s report had been ignored and suppressed.

I asked Pru-Bache for this report and the firm`s officers reluctantly but wisely provided it. The internal criticism (not considered a ``report``

because it was not typed) consists of five sheets of graph paper with the names of stocks, dates of purchases and sales for the Research Fund, and the recommendation put out on those stocks at the time of transaction by the firm. Schedule A lists about 20 examples of trades by the fund against the recommendation of Pru-Bache. On Aug. 7 last year, the firm issued a ``rating upgrade`` on Caterpillar Tractor; two days later, its Research Fund sold 35,000 shares.

Schedule B lists a score of trades made before a recommendation was issued to all Pru-Bache customers. For example, the fund bought 100,000 shares of American Airlines on Jan. 17, and the next day Pru-Bache`s research department raised its earnings estimate of that company.

Schedule C of the compliance officer`s complaint, in a different person`s handwriting, cites violations of the firm`s ``48-hour rule,`` self-imposed to guard against conflict of interest: For example, the Research Fund bought 40,000 shares of J.C. Penney on Aug. 6, the same day the research department was upgrading the rating.

Loren Schecter, general counsel, and Gregory Smith, director of research, both Hutton veterans brought to Pru-Bache by Ball, explained to me that this kind of trading can be justified. No portfolio is well managed by slavishly following all research recommendations. The compliance officer flagged cases of apparent inconsistencies that were reviewed and approved by top management. Making no judgments on legality, and giving Pru-Bache`s executives full credit for coming clean when asked, it seems to me that the sort of dealing criticized by the internal compliance officers is wrong. At the least, investors are entitled to fuller disclosure of the interests and activities of Pru-Bache`s advisers, especially when the firm`s fund is unloading a stock it is encouraging its customers to buy.

When brokerage houses are embarrassed by exposure of their practices, they probably should not be doing them.

I suspect, however, that corner-cutting will be on the increase as a result of the Meese Justice Department`s incredible policy laid down in the Hutton affair: that on Wall Street, there is such a thing as crime without criminals. Millions for corporate fines, goes the Meese motto, but not one day in jail for individual perpetrators.

The House Judiciary Subcommittee on Crime has received new evidence from regional offices that higher-ups at Hutton headquarters may have been involved in the check-kiting scheme. Ball has more explaining to do.

The attorney general is not the best judge of his department`s misjudgments; a complaisant predisposition may have existed in the Hutton case. Meese should hire special counsel to reopen the Hutton case and to look into his department`s wrongful closing thereof.